Ocwen grew profit but doesn’t want to rely solely on MSR gains

Ocwen Financial’s profitability improved thanks to gains in the value of its mortgage servicing rights during the third quarter.

Under generally accepted accounting principles, Ocwen reported $37 million in net income, up from $10 million in the second quarter and $22 million a year earlier due to the MSR gains. 

Analysts generally looked favorably on the results, but noted some concern that the company’s profitability was largely reliant on the increased market valuations, which can fluctuate over time.

“While OCN did report $37 million of GAAP net income, the company benefited from several favorable one-time items,” Kyle Joseph, John Hecht and Derek Sommers, equity analysts at Jefferies said in a research note Thursday.

Management acknowledged that the company took an adjusted, pretax loss to $8 million with the MSR gains excluded. However, executives also noted it wasn’t as large as the one it took the previous fiscal period.

“Our adjusted pretax loss was substantially reduced versus the second quarter,” Ocwen President and CEO Glen Messina said during the company’s earnings call.

Cost-cutting measures are continuing, and the company is on track to regain profitability on a pretax, adjusted basis by the fourth quarter, management said in response to an analyst’s question during the call.

Executives also said the company wants to use a diversified, balanced business model to achieve its aims such that it can profit from servicing but not be overly reliant on MSR valuations. Those valuations not only can be volatile but also will impose a new capital burden due under new Ginnie Mae rules going into effect in a couple of years.

“We are driving growth with a bias toward capital light subservicing,” Messina said.

One of the ways Ocwen is looking to achieve its aims is to form more MSR acquisition vehicles like MAV Canopy HoldCo I, a partnership it has with affiliates of Oaktree Capital Management.

The MAV joint venture involves an arrangement where Oaktree has provided 85% of the equity capital for the purchase of servicing rights from government-sponsored enterprises Fannie Mae and Freddie Mac, and Ocwen has contributed 15%. Ocwen also has provided subservicing for the MSRs. The company has expanded this partnership and has two more pending agreements with other businesses, executives said during the call. Other partnerships may not be configured exactly like MAV, they said.

Inclusive of partnerships like the one with MAV, more than half of Ocwen’s portfolio was subserviced based on the unpaid principal balance of loans at the end of the third quarter. In contrast, the owned Ginnie Mae portfolio is relatively small.

The company said Thursday it’s considering four options that could bring it into compliance with Ginnie Mae’s new rules.

These options include creating a separate entity supported by Ocwen’s PHH operating subsidiary for Ginnie Mae servicing, or forming a capital light structure for it. Ocwen alternately could convert the MSRs to subservicing or synthetic servicing. Another option would be to replace traditional Ginnie Mae MSRs (as opposed to the ones related to reverse mortgage securitizations) with other assets.

Reverse mortgages and traditional originations will continue to be subject to efficiency measures, management noted in the call. One of these is a move to consolidate the functions of the reverse mortgage platform and the system used for traditional home loans in both origination and servicing where they have processes in common. Some companies have found the two types of systems difficult to combine in the past, but Ocwen executives said they’ve seen early indications that the move could offer economies of scale.

“We’re one of the few competitors in the reverse space who has the capability to execute this strategy,” Messina said. “The initial results are promising.”